Needing To Relocate To Assisted Living Will Likely Make A Reverse Mortgage Due
Although some financial experts would argue that a home should not be a big part of someones nest egg for retirement, the truth is that often a home is just this. When someone takes out a reverse mortgage this can take a big amount of the money out of a home that will not be available for a nursing home or assisted living. Furthermore, when the borrower needs to move from the home where the reverse mortgage was taken the loan then becomes due. It could take a while to get any remaining money out of a home depending on how long it takes to sell.
What Is Wrong With Reverse Mortgages
The main argument against reverse mortgages is the cost. And as you can see from my calculations above, it is well-founded. For my $50,000 line of credit, though the actual interest rate was around 4% to 5.5%, the fees were $13,016. Thats over 26%!
Reverse mortgages pay very high commissions , so they can attract some of the most unsavory salespeople. Sometimes life insurance salespeople will even trick people into taking out a reverse mortgage in order to pay for a large life insurance policy. You have to be really careful who you trust when it comes to reverse mortgages.
Dave Where Are You Getting Your Info
Daves understanding of the rules of the HUD program are sadly mistaken in several areas. Dave thinks that homes worth more than $679,650 dont qualify for a reverse mortgage which is false.
Dave mistakes the HUD lending limit with a maximum your home can be worth. You could always have a home valued higher than the limit and still get the loan, there were just no additional benefits for homes valued above the maximum limit.
Dave thinks you cant owe any federal debts which is not accurate, but you may be required to pay them at closing in some cases. And Dave thinks heirs have two options when the borrowers pass, pay the loan off at the full amount or give the house to the lender.
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Your Spouse Is 62 Or Older
Any borrower on a reverse mortgage must be at least 62 years old. If youre married and your spouse isnt yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you die first, they cant receive any more reverse mortgage proceeds after youre gone.
If your reverse mortgage is set up as either a monthly income stream or a line of credit, your spouse might lose access to a source of income they were depending on. Also, reverse mortgage proceeds are based on the youngest spouses age . The younger that age is, the lower the amount you can initially borrow.
If you and your spouse are each at least 62, getting a reverse mortgage might be a good choice. Use an online calculator that is focused on reverse mortgages and talk to prospective lenders or your reverse mortgage counselor about how the value of proceeds you will get changes as you get older.
If you dont need the money immediately, postponing this loan may be a good way to increase the proceeds . And between now and then, you might find another solution to your financial concerns.
How Does A Reverse Mortgage Work
A reverse mortgage works like a regular mortgage in that you have to apply and get approved for it by a lender. Theyll use a bunch of details about you and your homefrom your age to the value of your propertyto figure out how much they can lend you.
To qualify for a reverse mortgage, you must:
- Be at least 62 years old
- Own a paid-off home
- Have this home as your primary residence
- Owe zero federal debts
- Have the cash flow to continue paying property taxes, HOA fees, insurance, maintenance and other home expenses
And its not just you that has to qualifyyour home also has to meet certain requirements. Single-family dwellings and multi-family units up to fourplexes are eligible for a reverse mortgage.
The Home Equity Conversion Mortgage program also allows reverse mortgages on condominiums approved by the Department of Housing and Urban Development.
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A Reverse Mortgage Fact Recap
How Much Money Do You Get From A Reverse Mortgage
The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your homes equity based on its appraised value. As of 2018, the maximum amount anyone can be paid from a reverse mortgage is $679,650. However, most people will be paid much less.
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What Is A Reverse Mortgage Exactly
A reverse mortgage is a type of loan thats only available to senior homeownersages 62 and olderwho have plenty of home equity .
As with a second mortgage, a reverse mortgage allows you to access your home equity in the form of a lump sum, a line of creditor even a fixed monthly payment.
While reverse mortgages give seniors access to large sums of money, keep in mind, this means theyd be borrowing against their housemeaning theyd lose the house if something went wrong. If that sounds crazy, its because it is.
Who Should Get A Reverse Mortgage
A reverse mortgage can help you turn your biggest financial asset into a monthly income. If these criteria apply to you, a reverse mortgage might be a viable option:
- You have a lot of equity in your home or it is paid off
- You want or need more money every month
- You don’t expect to have a financial hardship if you max out your proceeds before you die
- You want to preserve your retirement account balances
Reverse mortgages have their value, in the right circumstances. Just be sure to research how a reverse mortgage will affect your finances — and your family — before you sign on the dotted line.
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Where To Get A Reverse Mortgage
You can get a single-purpose reverse mortgage from a state or local agency. In this case, the lender will specify that the loan can only be used for one specific purpose — for example, to help you afford your property taxes. This type of reverse mortgage is for low- and moderate-income borrowers.
Private lenders also offer certain reverse mortgages. Those are called proprietary loans, and each lender sets its own terms and conditions. You may be able to borrow more with this kind of loan, and there are typically no restrictions on how you use the money.
Most reverse mortgages are Home Equity Conversion Mortgage loans, which are insured by the federal government. This loan is available from FHA loan lenders. There is no restriction on how you use the money.
Option #3 Move In With Family
Selling the home and moving in with family members is another great option to consider. Often seniors have difficulty with this decision because they do not want to be a burden to their family. While I understand this, I doubt your children or family members want to watch their loved one starve to death because they ran out of money in retirement.
Hard conversations need to be had in these situations. With the sale of the house, you could help support your family members financially to ease any type of added financial burden. Family needs to stick together and if this is something that is possible, it should be considered before a reverse mortgage is an option.
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What Is A Reverse Mortgage & How Does It Work
Most of us know what a mortgage is, a loan taken out to purchase a home. But what about a reverse mortgage? Luckily, whoever named it was left-brained, definitely not a creative type. It is just as it sounds.
With a traditional mortgage, you send money to the lender and your debt, which is secured by your house, decreases. With a reverse mortgage, the lender sends you money and your debt, still secured by your house, increases.
Most reverse mortgages are offered through the Home Equity Conversion Mortgages program, which is administered by the Housing and Urban Development Department and the Federal Housing Authority .
Dave Ramseys Views On Debt
Ramsey absolutely hates debt. Hes got a strong stance that all debt is bad. He believes that if you have debt, its better to put aside savings and investing and tackle that debt full force. He wants his followers to get out of debt at all because for him, it is the only way to achieve financial peace.
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You Have Medical Bills
People of retirement age with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual’s health declines to the point where they must relocate to a treatment facility, the loan must be repaid in full, as the home no longer qualifies as the borrower’s primary residence.
The guidelines in this article refer to home equity conversion mortgages , which are backed by the Federal Housing Administration .
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. For this reason, borrowers are required to certify in writing each year that they still live in the home they’re borrowing against, in order to avoid foreclosure.
This Again Is Either False Or Misleading At Best
Heirs can choose several options. If you want to keep the home, you may pay off the amount owed, or 95% of the current appraised value, whichever is less. This is usually achieved by a new refinance loan in the heirs name if they want to keep the home.
If they do not want to keep the home and there is still equity in the property, they can sell the home and pocket the equity. Or finally, if they do not want to sell the home because there is no equity remaining and do not wish to be involved in the property disposal, they can walk away and owe nothing regardless of the value and loan balance.
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Why Does Dave Ramsey Hate Reverse Mortgages
About a year or so back, Dave Ramsey put out a nasty video on YouTube about reverse mortgages. In his opening monologue, he couldnt see why a 92 year old lady who needed a little bit of cash to live comfortably would take a reverse mortgage.
Uncle Dave argued that she should take a 15 year mortgage. For those who arent that financially literate, he failed to point out that the monthly mortgage payment of a 15 year mortgage is higher than a 30 year mortgage, and that very few seniors on fixed income are likely to be able to afford it.
The fact that a person with a pretty prominent following would say something like that is irresponsible, dangerous, and deserves an educated response.
As usual, my main response is in a videoso if you like these sorts of things, click below to watch.
Now that youre done watching, lets pow wow for a bit. Dave Ramsey is seen as a financial guru to many people. He hates reverse mortgages, but he has other unique ideas about money as well.
IS IT A 3% RULE OR AN 8% RULE?
The most striking view of his that I disagree with the most is that retirees should withdraw 8% of their retirement portfolio each year. Remember, many financial experts dictate that one can safely take no more than 3% annually.
Why just 3%? Heres the deal, as of 2019 the stock market has been humming. Which obviously is great for all of us stock owners.
Daves argument with reverses goes as follows
Lets tackle both of these issues.
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Learn The Situations Where This Strategy Does And Doesn’t Make Sense
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A reverse mortgage is a type of mortgage loan that’s secured against a residential property that can give retirees added income by giving them access to the unencumbered value of their properties.
Homeowners who are short on cash and find their home equity is their biggest asset might consider a reverse mortgage when they dont have any other viable way to raise money for daily living expenses. In this case, they may want to take out a reverse mortgage.
However, this action is not a decision to make lightly because it’s probably taken years of hard work to accumulate your home equity taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest.
Some of the disadvantages to this approach include hefty fees and high-interest rates that can cannibalize a substantial portion of a homeowners equity.
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With A Reverse Mortgage You Are Risking The Loss Of Your Home
The largest risk of taking a reverse mortgage is losing a home. This is a big danger of taking any type of loan out on the equity of a home. For this reason, a reverse mortgage is almost always a bad idea.
Most of the time people take a reverse mortgage in the first place because they are having some issues with money. The problem is a reverse mortgage does have terms that do require some items to be kept up with in order to stay in the home. This includes keeping up with insurance payments and taxes. If a homeowner falls behind on these and is not able to pay them, the lender can take the home.
Taking a reverse mortgage is often where a person at retirement turns when they are tight on money and have nowhere else to turn. The problem is bills always do seem to pile up. Take a reverse mortgage and then your taxes and insurance go up how will these bills be maintained?
Having a place to live is a necessity in life. We all need a roof over our head. For a retiree on a fixed income, a home loss is a real possibility with a reverse mortgage and a chance that should not be taken.
Reverse Mortgages Arent For Everyone We Agree
Because here are some things on which we agree with Dave, but we think he only shows one side of the coin in this part of his pitch. Reverse mortgages are not for all senior borrowers. If you are not able to make payment of taxes, insurance and all other obligations even after you obtain your reverse mortgage, then it is not the right loan for you.
It is a default under the terms of the loan if you do not pay your taxes and insurance on time or if you let the property fall into serious disrepair so we advise borrowers to bring family members into the discussion and to be sure that this loan makes their finances secure enough to where payment of these obligations is never in question.
If you still cannot afford to live comfortably with all obligations after a reverse mortgage, you should consider other options.
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When Does It Make Sense To Get A Reverse Mortgage
As odd as it sounds to talk about the positive of a mathematically terrible financial decision, I feel there are instances when a reverse mortgage does make sense. I only suggest a reverse mortgage if you are willing to take the tenure option, for it to possibly be a good idea.
Here are the instances when I believe a reverse mortgage may make sense. All of these criteria must be met for it to be a realistic option:
- When the borrowers home is paid off and they do not have enough money in retirement or social security to live a healthy life.
- When the borrower does not have any family or friends that can help them financially.
- If the income from a lifetime monthly reverse mortgage payment is enough to sustain life in retirement to include HOA and property taxes on their home.
- The borrower must expect that their heirs will have to sell the home or give it back to the bank after their death. It can not be relied upon as any part of an inheritance.
- A reverse mortgage should be an absolute last option.
- It never makes sense to take the lump sum or term payments that expire.
Can You Lose Your Home If You Have A Reverse Mortgage
As with any loan, you are required to pay the taxes, insurance, and any other property charges as they become due. Failure to do so could result in the lender calling the loan due and payable. However, if you pay your property charges, it makes no difference what the balance is on the loan, you may remain in the home for life without making a loan payment on the mortgage.
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